The market hit yet another high as bulls acquired fresh energy. Monday’s leap to 5,750+ came on high volumes in the cash segment and extraordinary volumes in futures and options (F&O). It also had excellent advance-decline ratios. The upmove started in late May at just below 4,800.
It has run for roughly 1,000 points and, even more important, the 21 per cent upmove has lasted 15 weeks. The Nifty is now in a territory that has not been traded since January-February 2008 and, so, resistance-support calculations are inexact.
As of the short-term, there is support between 5,650 and 5,700. Below 5,650, there should be support at roughly 50-point intervals. On the upside, chart based-calculations suggest there is just a chance the market could test 6,000, but 5,900 is more likely to be insurmountable resistance.
The upturn came on the basis of very strong buying by foreign institutional investors (FIIs), which cancelled out substantial selling by their domestic (DII) counterparts. The bulls were focused on metals, which is in line with global commodity trends. The other gainer was banks, where the buying was boosted by operator interest.
The long-term trend is obviously bullish, but the time factor is one cause for nervousness. Intermediate trends very rarely last longer than 15-16 weeks at the outside. So, a correction could start inside this settlement.
Fibonacci calculations suggest the next intermediate correction could pull the market down by five-seven per cent. That would be roughly 5,350, and such a downturn could last between four and six weeks.
The BankNifty and CNXIT backed the broader upturn. The CNXIT could underperform the broader trend, but the BankNifty looks like a major driver. Weakness in the bank sector, as and when it comes, is likely to be a trigger for intermediate correction.
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Volatility is likely to remain quite high. There seems to be an end to the earlier pattern of range-trading with very small high-low ranges on a daily basis. The trader should now be braced for a 250-point swing in either direction in a given week. In the context of this week, a move till either 5,500 or 6,000 is possible.
The Nifty put-call ratio (PCR) is now in an extreme range. In the September settlement, with respect to open interest (OI), the PCR is at 2.2, which looks unsustainable. This is an indicator that there could be violent swings in both index values and premiums.
Current option spreads are quite attractive. At 5,760, a bullspread of long 5,800c (50) and short 5,900c (20) offers a potential maximum return of 70 on a cost of 30. The near-the-money bearspread of long 5,700p (47) and short 5,600p (26) costs 21 and offers a maximum return of 79. One of these spreads will be struck for sure next week. A combined long-short strangle would cost 51 and pay a maximum 49 with breakevens at 5,649, 5,851. A wider long 5,900c, long 5,600p laid off with a short 6,000c (7) and short 5,500p (15) has a net cost of 23. The breakevens are at 5,577, 5,923 and the potential gain in either direction is 77.